George Osborne: We need new bank to rival 'big four'

George Osborne has called for a new high street bank to boost competition and benefit millions of customers.

The Chancellor asked for a challenger to the "Big Four" as he announced the start of moves to sell the taxpayer's £70 billion stake in UK banks.

In his Mansion House speech this evening, he fired the starting gun for the sale of state-owned Northern Rock. Mr Osborne was saying: "On behalf of you, the British taxpayer, I have decided to put Northern Rock up for sale.

"Images of the queues outside Northern Rock branches were a symbol of all that went wrong, and its chaotic collapse did great damage to Britain's international reputation.

"It was nationalised and its return now to the private sector would help to rebuild that reputation. It would be a sign of confidence and could increase competition in high street banking." He said the process will be open and transparent and in line with state aid rules.

"Any interested parties can bid for it, including mutuals, which this Government is actively committed to promoting. And the sale of Northern Rock would be a very important first step in getting the British taxpayer out of the business of owning banks."

The Chancellor made clear he wants a new major bank to emerge. He was not due to mention Royal Bank of Scotland or the Lloyds Banking Group, in which the taxpayer has huge stakes.

But the taxpayer's gradual exit from the banking sector will eventually lead to the the public's shares in these two banking giants being sold.

In his speech, the Chancellor also put in place measures to protect banks from future disasters including making them "ring-fence" their retail business from their investment operations and increase the capital they hold.

These requirements will increase the cost to customers, say experts, who warned free current accounts could be axed.

They also face higher mortgage, credit card and banking charges due to changes meant to stop a repeat of the banking crisis that plunged Britain into recession.

In his speech, Mr Osborne was set to announce the Government will back a proposal to order banks to "ring-fence" their retail business from their investment operations.

He is also expected to make clear that banks will have to hold more capital to protect against future losses, so they do not have to be bailed out again.

Vicky Redwood, economist at Capital Economics, said: "These changes could mean a significant rise in borrowing costs or other charges. Ending free bank accounts is one of the ways [banks] might try to increase profitability."

Ralph Silva, director of research house SRN, said he the cost of bank products could rise 10 per cent on average: "There is a very good chance that [the banks] use this to eliminate free current accounts."

The British Bankers' Association spokesman said: "An increase in capital requirements will increase the cost of running a bank but ... it's far too soon to speculate on how this might affect charging arrangements."

The reforms have been proposed by the Independent Commission on Banking, chaired by Sir John Vickers. "Ring-fencing" aims to safeguard banks' retail work from exposure to the risks taken by their "casino" investment arms. Retail operations could be forced to have their own premises, IT systems, staff and funding.

The Commission suggested a capital requirement of £10 for every £100 banks lend, compared with the current £7. The report suggests this could put up to £23 a month on a £200,000 mortgage.its Its final report is published on September 12.